Morning Report
Today's economic developments and market movements.
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Key themes: A rally in large techonology stocks drove US equities to fresh all-time highs.
Optimism over a resilient economy, improving corporate earnings and the potential start of rate cuts has supported equities, defying concerns that the rally has been concentrated in just a few mega-cap tech stocks.
US treasury yields were higher across the curve, but remained comfortably towards the bottom of the last 3-months range.
Bond yields were also higher in Europe. The spread between the French and German 10-year bond yields blew out further to its highest level since late 2012 (79bps) on continued concerns surrounding the Frech election.
The US dollar pulled back slightly but remained bouyant despite treasury yields hovering around the bottom of recent ranges.
Share markets: A rally in large techonology stocks drove US equities to fresh all-time highs. The S&P 500 rose 0.8%, while the Dow Jones and the NASDAQ were up 0.5% and 1.0%, respectively.
Optimism over a resilient economy, improving corporate earnings and the potential start of rate cuts has supported equities, defying concerns that the rally has been concentrated in just a few mega-cap tech stocks.
Risk sentiment improved in Europe, where markets continue to jostle with the news flow out of the snap French election. The Euro Stoxx 50 jumped 0.9%, while the German Dax gained 0.4%. The mood was a little more subdued in the UK, where the FTSE 100 edged down 0.1%.
The ASX 200 was down 0.3% yesterday but futures are pointing to a slightly more supportive open this morning.
Interest rates: US treasury yields were higher across the curve, but remained comfortably towards the bottom of the last 3-months range. The 2-and-10-year yields both rose 6 basis points to 4.77% and 4.28%, respectively.
Swaps markets are pricing in around a 60% chance of a second rate cut from the Fed this year, though the first cut is only fully priced in by December.
Bond yields were also higher in Europe. 10-year yields were up 6 basis points in the UK and and 5 basis points in Germany. The spread between the French and German 10-year bond yields blew out further to its highest level since late 2012 (79bps) on continued concerns surrounding the Frech election.
Aussie bond futures followed offshore moves overnight. The 3-year (futures) yield rose 3 basis points to 3.79%, while the 10-year (futures) yield was up 5 basis points to 4.16%. Traders have upped the odds of an RBA rate cut this year to around 70%.
Foreign exchange: The US dollar pulled back slightly but remained bouyant despite treasury yields hovering around the bottom of recent ranges. The US dollar has been supported by risk-off flows as investors re-position to account for risks tied to the French election. The DXY traded between 105.31 and 105.65 and is currently sitting around 105.35.
The Aussie dollar remaind stuck arround 66 cents after quickly unwinding last week’s run up to 0.6700. The AUD/USD slipped to a low of 0.6585 yesterday, but retraced to finish around 0.6612.
The Pound abd the euro both gained against the Greenback closing around 1.2704 and 1.0732, respectively. But the bounce did little to unwind the recent sell-off in both majors.
The Yen continued to slip on the back of recently renewed US dollar strength. The USD/JPY had a look at 158 after breaking through that level the session prior. But traders remain cautious as the Yen relenqueshes around levels which recently triggered intervention from Japanese officials.
Commodities: The West Texas Intermediate (WTI) price of oil jumped 2.4%, to US$80.33 per barrel. This was the first close above US$80 per barrel in almost three weeks.
However, the broader story in commodities overnight was one of softer prices. Iron ore (-2.0%), gold (-0.6%) and copper (-0.8%) all finished lower.
Australia: The ANZ-Indeed mesaure of job ads slipped for a fourth consecutive month in May falling 2.1%. In annual terms job ads were 18.1% lower as strong employment growth and weakening domestic demand erodes the backlog of excess labour demand. The continued pull-back in job ads supports our expectation of a further gradual easing in labour market conditions over the remainder of 2024.
China: China’s recovery in economic activity lost a bit of puff in May, but the gradual upswing remains in tact.
Industrial production rose 5.6% over the year to May, down on the 6.7% annual gain in April and coming in below expectations for a 6.2% increase. Fixed asset investment also surprised to the low side rising 4.0% over the first five months of the year compared to the same period last year. Fixed asset investment is being impacted by weakness in the property market, but robust investment in high-tech manufacturing is providing some support.
The property sector continued to drift lower despite increased policy support. New and used home prices declined by 0.7% and 1.0% respectively in May, a similar pace to last month. Investment in the sector remains 10% lower year-to-date than in 2023.
Retail sales rose 3.7% over the year to May, surpassing expectations for a 3.0% annual gain. Retail spending had a temporary boost from an extended holiday in May with household confidence otherwise in short supply.
Japan: Core machine order fell 2.9% in April, meeting consensus expectations. The monthly fall partly retraces solid growth in orders over February and March, leaving orders just 0.7% higher compared to a year ago.
United States: Philadelphia Fed President, Patrick Harker, said he expects one rate cut to be appropriate in 2024 if his forecasts play out as expected. This is in line with the median expectation in the Fed’s most recent ‘dot plot’. Harker sees slowing but above-trend economic growth, a modest rise in the unemployment rate, and a “long glide” back to he inflation target as his base case.
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